Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Except for historical information contained herein, this “Management’s Discussion and Analysis o
f
Financial Condition and Results of
Opera
tions
” contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company’s existing and potential future product lines of business; the Company’s ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company’s future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
Past
results are
no guaranty future
performance
.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made. When used with this Report, the words “believes,” “anticipates,” ”expects,” “estimates,” “plans,” “intends,” “will” and similar expressions are intended to identify forward-looking statements
As a result of continuing delays in the permitting process for construction of modifications needed for our new CVD Materials facility in Central Islip, NY, we believe that we will not begin operations at this facility until the latter part of the second quarter of 2019. In order to minimize the delay, we have engaged a new architect and have met with local officials to try to accelerate the permitting process in order to finish necessary construction. As a result of this delay, we have and will incur additional expenses and carrying costs associated with the CVD Materials facility which we did not anticipate. We do however, remain very optimistic about the CVD Materials business and its contribution to the Company’s future success.
Additionally, the level of new orders from customers has not been received as anticipated, and without these orders, we believe our level of revenue for the fourth quarter of 2018 will approximate the level of revenue in the third quarter. As a result, we expect to report operating losses for the fourth quarter of 2018 and first quarter of 2019 and the timing for return to profitability depends upon, among other things, the receipt of new orders, receiving the necessary building permits and the ensuing ramp up of the materials business. We are reviewing our planned expenditures and operating expenses, for potential cost savings to minimize these losses.
Our line of credit expired by its terms in September 2018. We have elected not to renew our credit line at this time because (a) renewal terms were not acceptable to us, (b) we have not borrowed on our line of credit in the past 10 years, and (c) we have sufficient cash and cash equivalents (approximately $14.2 million as of September 30, 2018) to meet our working capital and capital expenditure requirements over the next twelve months.
During the third quarter, we continued our mission to develop and enable the commercialization of next-generation technologies, by incorporating our technology into equipment built for customers’ manufacturing processes. Our endeavors into electronic applications for LED materials, medical implants and coatings, carbon composites for MEMs devices and medical applications are some of the areas we have been working on.
We continued to make a significant investment in our CVD Materials business. In November 2018, we filed a provisional patent application for a
family of advanced Fluid Reactors based on our innovations in nanotechnology and chemical vapor deposition technology. The Fluid Reactor is enabled by a novel reactor core element which allows the efficient transfer of gases into and out of liquids. The market adoption of this technology could supplant existing hollow fiber membrane technology for applications including filtration and liquid gasification or degasification. One application is blood oxygenation cartridges known as an Extra Corporeal Membrane Oxygenator which is typically used during cardio pulmonary bypass (CPB) surgery and is essential for life support.
Our Mesoscribe™ Direct Write Technology continues to make progress in specialized applications for temperature sensors, conformal antennas, flexible electronics and heaters for applications in aerospace and electronics where standard solutions have been unable to meet the physical constraints that need to be addressed. To assist in our progress, Mesoscribe™ has been notified that they have been selected for three (3) government sponsored awards which we anticipate receiving in first quarter 2019.
Our new CVD Materials facility has now received site plan approval and we anticipate permits for building modifications and obtaining a Certificate of Occupancy will be following shortly. We continue to impress upon the regulatory authorities the financial and time impact the delays are causing with our business.
Investments in our Application Laboratory and CVD Materials are driving us forward regardless of quarterly revenue fluctuations. We continue to believe that expansion and innovation in key markets like aerospace, medical, MEMs, semiconductors is the key to securing our growth over the long-term.
We continue to dedicate significant portions of our technical and manufacturing resources to new materials development and opening of the new CVD Materials facility. They pave the way for future expansion across our portfolio and to improve and streamline revenue growth and profitability over the longer term.
Constant investment in expansion and innovation is necessary, even during times of reduced order levels, to strengthen and secure our competitive position and open up new opportunities in the markets we serve. We believe we are well capitalized and will continue to drive towards increased yet stable revenue, productivity and profitability over the long-term.
Please review a new presentation that is posted on our website to gain further insight into the new applications and products.
Results of Operations
Three Months Ended
September 30, 2018 vs. Three Months Ended September 30, 2017
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
September30, 2017
|
|
|
Change
|
|
|
% Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVD (net of eliminations)
|
|
$
|
2,543
|
|
|
$
|
8,833
|
|
|
$
|
(6,290
|
)
|
|
|
(71.2
|
)
|
SDC (net of eliminations)
|
|
|
959
|
|
|
|
1,999
|
|
|
|
(1,040
|
)
|
|
|
(52.0
|
)
|
Materials (net of eliminations)
|
|
|
526
|
|
|
|
---
|
|
|
|
526
|
|
|
|
|
|
Total Revenue
|
|
|
4,028
|
|
|
|
10,832
|
|
|
|
(6,804
|
)
|
|
|
(62.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
4,084
|
|
|
|
6,229
|
|
|
|
(2,145
|
)
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (Loss)/Profit
|
|
|
(56
|
)
|
|
|
4,603
|
|
|
|
(4,659
|
)
|
|
|
(101.2
|
)
|
Gross Margin
|
|
|
(1.4
|
%)
|
|
|
42.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
241
|
|
|
|
158
|
|
|
|
83
|
|
|
|
52.5
|
|
Selling and shipments
|
|
|
331
|
|
|
|
345
|
|
|
|
(14
|
)
|
|
|
(0.4
|
)
|
General and administrative
|
|
|
2,225
|
|
|
|
2,209
|
|
|
|
16
|
|
|
|
5.6
|
|
Total operating expenses
|
|
|
2,797
|
|
|
|
2,712
|
|
|
|
193
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income
|
|
|
(2,853
|
)
|
|
|
1,890
|
|
|
|
(4,743
|
)
|
|
|
(251.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)/income, net
|
|
|
(74
|
)
|
|
|
14
|
|
|
|
(88
|
)
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Income before taxes
|
|
|
(2,927
|
)
|
|
|
1,904
|
|
|
|
(4,831
|
)
|
|
|
(253.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)/expense
|
|
|
(424
|
)
|
|
|
508
|
|
|
|
(932
|
)
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(2,503
|
)
|
|
|
1,396
|
|
|
|
(3.899
|
)
|
|
|
(279.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share basic and diluted
|
|
|
(0.39
|
)
|
|
|
0.22
|
|
|
|
(0.61
|
)
|
|
|
277.3
|
|
Revenue
Our revenue for the three months ended September 30, 2018 was $4.0 million compared to $10.8 million for the three months ended September 30, 2017. This decrease of $6.4 million or 62.8% was a result of the reduction in revenue previously generated by the large aviation component supplier production contracts which were completed, a reduced level of new orders from customers, and having recognized revenue in previous periods as a result of higher costs than originally anticipated on certain contracts in progress. The customer in the aerospace industry represented approximately 26.0% and 59.0% of our revenue for the three months ended September 30, 2018 and September 30, 2017, respectively. We are continuing to receive additional follow-on business from that customer as well as undertaking opportunities with new and other current customers Our business of selling capital equipment has historically been uneven and although our current level of “RFQs” (requests for quotation) remains high, the level of new orders from customers has not been received as anticipated. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition. Third-party revenue from the SDC division for the three months ended September 30, 2018 decreased by 52.0% to $959,000 compared to $1,999,000 as a result of the completion of a significant order from one customer. We recorded $526,000 of revenue from CVD Materials for the three months ended September 30, 2018 despite continuing delays in the permitting process for construction of modifications needed for our new CVD Materials facility. We believe that we will not begin operations at this facility until the latter part of the second quarter of 2019.
Gross (Loss)/Profit
We generated a negative gross profit of $56,000 for the three months ended September 30, 2018 compared to a gross profit of $4.6 million for the three months ended September 30, 2017. The gross margin for the three months ended September 30, 2018 was (1.4)% compared to 42.5% for the three months ended September 30, 2017. The negative gross profit and gross margin was the result of revised cost estimates and unutilized excess production labor. We recognized estimated losses on certain contracts where the actual costs incurred were greater than estimated in prior periods. Reductions in personnel began towards the end of the prior three-month period and we are continuing to evaluate personnel levels and other cost savings measures to minimize losses.
Research and Development, Selling, General and Administrative Expenses
Internal research and development expenses for the three months ended September 30, 2018 were $241,000 compared to $158,000 for the three months ended September 30, 2017 as we continue to ramp our efforts of independently conducted research and development activities especially for CVD Materials. As mentioned above, in November 2018, we filed a provisional patent application for a family of advanced Fluid Reactors having a novel reactor core element. One application is blood oxygenation cartridges known as an Extra Corporeal Membrane Oxygenator which is typically used during cardio pulmonary bypass (CPB) surgery and is essential for life support. In addition, Mesoscribe™ was notified that they were selected for three (3) government sponsored awards which we anticipate receiving in first quarter 2019.
Selling and shipping expenses for the three months ended September 30, 2018 totaled $331,000 inclusive of costs in personnel and trade shows related to CVD Materials of $50,000. Selling and shipping expenses for the three months ended September 30, 2017 totaled $345,000 which included costs of $96,000 related to personnel for CVD Materials Corporation.
General and administrative expenses for both the three months ended September 30, 2018 and 2017 totaled approximately $2.2 million. Personnel and occupancy costs attributed to CVD Materials Corporation totaled $433,000 during the three months ended September 30, 2018 compared to $219,000 of costs attributed to CVD Materials during the three months ended September 30, 2017.
Operating
(Loss)/
I
ncome
We incurred a loss from operations of $2.9 million for the three months ended September 30, 2018 primarily as a result of the reduced revenues for the period, unutilized excess production labor, product cost overruns of certain systems and operating expenses of $2.8 million of which approximately $500,000 was attributable to CVD Materials compared to the three months ended September 30, 2017 when we achieved $10.8 million in revenue yielding a 42.5% gross margin and incurred operating expenses of $2.7 million,
Income tax (benefit)/expense
We did not incur any current income tax expense and recorded a deferred income tax benefit of $425,000 for the three months ended September 30, 2018 primarily as a result of the tax loss incurred during the period. For the three months ended September 30, 2017 we incurred an income tax expense of $508,000
Net (Loss)/Income
We reported a net loss of approximately $2.5 million or ($0.39) per share basic and diluted for the three months ended September 30, 2018 compared to net income of approximately $1.4 million or $0.22 per share basic and diluted for the three months ended September 30, 2017.
Nine Months Ended September 30, 2018 vs. Nine Months Ended September 30, 2017
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
Change
|
|
|
% Change
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVD (net of eliminations)
|
|
$
|
14,883
|
|
|
$
|
26,741
|
|
|
$
|
(11,858
|
)
|
|
|
(44.3
|
)
|
SDC (net of eliminations)
|
|
|
3,478
|
|
|
|
4,571
|
|
|
|
(1,093
|
)
|
|
|
(23.9
|
)
|
Materials (net of eliminations)
|
|
|
1,256
|
|
|
|
---
|
|
|
|
1,256
|
|
|
|
|
|
Total Revenue
|
|
|
19,617
|
|
|
|
31,312
|
|
|
|
(11,695
|
)
|
|
|
(37.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
14,796
|
|
|
|
18,128
|
|
|
|
(3,332
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
4,821
|
|
|
|
13,184
|
|
|
|
(8,363
|
)
|
|
|
(63.4
|
)
|
Gross Margin
|
|
|
24.6
|
%
|
|
|
42.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
466
|
|
|
|
339
|
|
|
|
127
|
|
|
|
37.5
|
|
Selling and shipping
|
|
|
1,244
|
|
|
|
984
|
|
|
|
260
|
|
|
|
26.4
|
|
General and administrative
|
|
|
6,434
|
|
|
|
6,423
|
|
|
|
11
|
|
|
|
0.2
|
|
Total operating expenses
|
|
|
8,144
|
|
|
|
7,746
|
|
|
|
398
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income
|
|
|
(3,323
|
)
|
|
|
5,438
|
|
|
|
(8,761
|
)
|
|
|
(161.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
|
(268
|
)
|
|
|
5
|
|
|
|
(273
|
)
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Income before taxes
|
|
|
(3,591
|
)
|
|
|
5,443
|
|
|
|
(9,034
|
)
|
|
|
(166.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)/expense
|
|
|
(316
|
)
|
|
|
1,766
|
|
|
|
(2,082
|
)
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(3,275
|
)
|
|
|
3,677
|
|
|
|
(6,952
|
)
|
|
|
(189.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share basic and diluted
|
|
|
(0.51
|
)
|
|
|
0.58
|
|
|
|
(1.09
|
)
|
|
|
(187.9
|
)
|
Revenue
Revenue for the nine months ended September 30, 2018 was $19.6 million compared to $31.3 million for the nine months ended September 30, 2017, a decrease of $11.7 million or 37.3%. As a result of the reduction in revenue previously generated by the large aviation component supplier production contracts which were completed, the reduced level of new orders from customers, and having recognized revenue in previous periods as a result of higher costs than originally anticipated on certain contracts in progress, we experienced this decrease in revenue. This large aviation component supplier represented approximately $7.8 million or 40.0% of our revenue for the nine months ended September 30, 2018 compared to $20.4 million or approximately 65% of our revenue for the nine months ended September 30, 2017. Our business of selling capital equipment has historically been uneven and although our current level of “RFQs” (requests for quotation) remains high, the level of new orders from customers has not been received as anticipated. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If any of our significant customers do not place orders, or they substantially reduce, delay or cancel orders, we may not be able to replace the business in a timely manner or at all, which could have a material adverse effect on our results of operations and financial condition. Despite continuing delays in the permitting process for construction of modifications needed for our new CVD Materials facility, CVD Materials has recorded $1,256,000 in revenue for the nine months ended September 30, 2018. We believe that we will not begin operations at this facility until the latter part of the second quarter of 2019.
Gross Profit
For the nine months ended September 30, 2018, we generated a gross profit of $4.8 million resulting in a gross profit margin of 24.6% compared to a gross profit of $13.2 million for the nine months ended September 30, 2017, which resulted in a gross profit margin of 42.1%. The decreased gross profit and gross margin was the result of revised cost estimates and unutilized excess production labor. We recognized estimated losses on certain contracts where the actual costs incurred were greater than estimated in prior periods. Reductions in personnel began towards the end of June, 2018 and we are continuing to evaluate personnel levels and other cost savings measures to minimize losses.
Research and Development, Selling and General and Administrative Expenses
Internal research and development expenses for the nine months ended September 30, 2018 were $466,000 compared to $340,000 for the nine months ended September 30, 2017, as we continue to ramp our efforts of independently conducted research and development activities. Some of the benefits from this and previous years R&D we anticipate will start to be reflected in 2019 with the Materials facility becoming operational.
Selling and shipping expenses for the nine months ended September 30, 2018 totaled $1,244,000 an increase of 26.4% compared to a total of $984,000 for the three months ended September 30, 2017. The increase is attributable to the additional costs of $265,000 related to CVD Materials.
We incurred $6.4 million of general and administrative expenses for both the nine months ended September 30, 2018 and the nine months ended September 30, 2017,which included approximately $1,422,000 and $635,000 of personnel and occupancy costs attributable to CVD Materials Corporation in the respective periods.
Operating (loss) Income
As a result of: 1) decreased revenues; 2) unutilized excess production labor; 3) product cost overruns on certain systems; 4) recognition of losses on certain contracts due to higher costs than anticipated on contracts in progress in prior periods and 4) costs attributable to CVD Materials Corporation, we incurred a loss from operations of $3.3 million for the nine months ended September 30, 2018 compared to achieving income from operations of $5.4 million for the nine months ended September 30, 2017.
Income tax (benefit)/expense
We did not incur any current income tax expense and recorded a deferred income tax benefit of $316,000 for the nine months ended September 30, 2018 primarily as a result of the tax loss incurred during the period. For the nine months ended September 30, 2017 we incurred an income tax expense of $1,766,000.
Net (Loss)/Income
We reported a net loss of $3.3 million or ($0.51) per share basic and diluted for the nine months ended September 30, 2018 compared to net income of $3.7 million or $0.58 per share basic and diluted for the nine months ended September 30, 2017.
Inflation
Inflation has not materially impacted the operations of our Company.
Liquidity and Capital Resources
As of September 30, 2018, we had working capital of $17.7 million compared to $22.4 million at December 31, 2017, a decrease of $4.7 million primarily due to the reduction in contract assets of $5.8 million. As we reach certain milestones on our long-term projects, we invoice our customers for work completed thus reducing those costs in excess of billing. We had cash and cash equivalents of $14.2 million at both September 30, 2018 and December 31, 2017.
Accounts receivable, net, as of September 30, 2018 was $2.6 million compared to $2.1 million at December 31, 2017. This increase is principally due to the timing of customer invoicing, shipments and customer payments on outstanding balances.
Our Revolving Line of Credit expired on September 1, 2018. We have elected not to renew our credit line at this time because (a) renewal terms were not acceptable to us, (b) we have not borrowed on our line of credit in the past 10 years, and (c) we have sufficient cash and cash equivalents (approximately $14.2 million as of September 30, 2018) to meet our working capital and capital expenditure requirements over the next twelve months.
At September 30, 2018 the number of fulltime employees decreased to 187 employees compared to 212 at December 31, 2017. Towards the end of the period ended June 30, 2018, we began reducing personnel to more closely match our reduced revenue flow and are continuing to evaluate personnel levels.
We believe that our cash and cash equivalents position and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months, a significant portion of which will be related to CVD Materials and the additional building.
Off-
B
alance
S
heet
A
rrangements.
We have no off-balance sheet arrangements at this time.